The Seven Baby Steps

The Seven Baby Steps of Debt Elimination

American financial author and radio host Dave Ramsey has gained a following for his debt elimination techniques. His plan involves what he calls “The Seven Baby Steps” that he encourages those struggling with debt to take.

The first of these is to save $1000 in an emergency fund. The idea here is to avoid becoming more deeply indebted in the case of an unplanned and costly situation.

The second step involves what Ramsey calls the “Debt Snowball” for the way progress is intended to grow as it gains momentum. To use the debt snowball, you would list all your debts (aside from your mortgage) to determine the order of the balances. Then, you prioritize your smallest balance in order to pay that one first. Once that is paid, you apply the amount you were paying on that balance to the debt with the next smallest balance. You proceed this way until all your cards/loans are paid off. The premise of the snowball is that these victories will encourage you to stay motivated about eliminating your debt.

The third step is more saving, this time 3 to 6 months’ worth of living expenses. This is meant to be a cushion in the case of any event that would seriously impact your life, such as a job loss or medical emergency, and similar to the first step, it will provide a barrier between you and more debt.

The final four steps assume your debts are paid off with the exception of your mortgage and that you have a substantial emergency fund. At this point, you would begin investing 15% of your household income into Roth IRAs and pre-tax retirement plans. Then, begin a college savings plan for your children (or yourself). The sixth step is to pay off your mortgage early. Ramsey asserts that by putting any and all extra money toward paying down your mortgage, you will gain momentum and encouragement similar to the debt snowball.

Once you presumably have no more debt or payments of any kind, the seventh and final step is to build wealth and give, by saving money for yourself, for your family in the future, and sharing your good fortune with others.